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Beginning in 1990 with the Second Circuit Court of Appeals’ controversial Bellefontedecision, a battle has raged on between parties to facultative certificates over whether a certificate’s reinsurance limit of liability is a cap on both reinsurance liability and expenses. For the most part, that battle has favored the reinsurers, with courts finding no ambiguity in the certificate’s wording and refusing to exclude expenses from the overall certificate cap unless there was specific language excluding expenses from the reinsurance limit of liability. Arbitration panels, on the other hand, have often take a different view of how a facultative certificate is meant to perform.

Not surprisingly, decisions both in courts and before arbitration panels depend on the facts. Not all facultative certificates are equal. The reinsurance limit of liability provisions and subject to clauses differ from reinsurer to reinsurer and from broker to broker. Facial similarities between certificates may belie the nuanced distinctions found by parsing small word changes and grammatical alterations.

In a surprising but perhaps welcomed development, the Second Circuit Court of Appeals, in its most recent review of this controversy, recognized that wording differences may have ramifications to whether the rote Bellefonte analysis should prevail.

In a Summary Order, which has no precedential effect, the Second Circuit, in December 2014, sent a case back to the district court to examine extrinsic evidence because the circuit court found the wording of the facultative certificate to be ambiguous on the issue. Utica Mut. Ins. Co. v. Munich Reins. Am. Inc., No. 13-4170-cv, 2014 U.S. App. LEXIS 22765, 2014 WL 6804553 (2d Cir. Dec. 4, 2014).

Here, the court found that the certificate was ambiguous as to whether its limit of liability included expenses. While it agreed with the cedent that the certificate could be read to exclude expenses from the limit of liability based on the subject to clause, it also found that the wording could operate as a general provision limiting all of the reinsurer’s liability to the reinsurance amount.

What is notable and controversial given the summary order nature of the decision, is the Second Circuit’s willingness to re-examine its precedent and that of the New York Court of Appeals and distinguish the language of the facultative certificates in each case. Essentially, the court, while acknowledging the judicial development of a presumption that the limits of liability in a facultative certificate are unambiguously expense-inclusive, held that the presumption can be rebutted by more than showing express language excluding expenses or a separate limit for expenses.

Because this decision is in a summary order, it cannot be viewed as precedent. It is limited to the specific facts of this case and the specific differences in the language of this facultative certificate compared to the others found in Bellefonte and its progeny. But even though the decision is a summary order, it gives some life to the arguments made by cedents that these certificates are ambiguous and that extrinsic evidence is necessary to interpret the true intent of the parties.

But cedents should not get their hopes up too high. The court’s conclusion based on the specific facts in this case should not be read to suggest that the cedent is likely to or should prevail following consideration of extrinsic evidence. Moreover, an Illinois intermediate appellate court, just weeks later, upheld a Bellefonte defense in Cont’l Cas. Co. v. MidStates Reins. Corp., No. 1-13-3090, 2014 Ill. App. LEXIS 872 (IL. App. Dec. 16, 2014). Thus, the challenge of cedents to overcome a Bellefonte defense is still difficult, but perhaps now it is not as insurmountable as it was before December 2014.

Compare jurisdictions: Arbitration

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